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August 10, 1955 Honorable Joseph T« Robinson, United States Senate, Washington, D* C . Dear Senator Robinson* I should like to draw your attention to certain banking end monetary aspects of the Frazier-Lemke Bill (S. 212). As you know, the bill provides that the refinancing of farm mortgages be carried through iri-th the proceeds of the issue, at par, of 1 1/2 percent Federal land bank bonds. In case such bonds are not "readily purchased®, the Federal Reserve Board is directed to take them up and pay for them with Federal Reserve notes, up to $3,000,000,000* It appears obvious that the bonds would not be readily purchased, since bonds cannot be issued for the periods over which the mortgages run, sixty-six years, at 1 1/2 percent* Even Government bonds with a ten-year maturity yield more than 2 1/2 percent. The Federal Reserve Board would, therefore, be called upon to take up these bonds to the extent of $5,000,000,000* The issue of $5,000,000,000 of Federal Reserve notes in this manner would have serious monetary consequences* Hotes issued to present mortgage holders, the majority of whom are institutions, would not remain in circulation, since there would be no reason to expect from the passage of this bill any increase in the demand for hand-to-hand currency* The notes, therefore, or an equivalent amount of other currency, would be immediately deposited inijanks. The banks, in turn, having no use for the cash, would redeposit it with the Reserve banks, where it would count as additional reserves of member banks. These reserves are at present #2,500,000,000 in excess of legal requirements, and the issue of |3,000,000,000 of notes would have the effect of increasing these excess reserves to a figure of more than $5,000,000,000* On the basis of excess reserves of this magnitude, member banks could, when a credit expansion got under way, create additional deposits to the extent of move than §5Q*OOQ*OQQ*OQOj in1 other words* they could considerably uore then doable the country s nesns of payment* or fconey* There ^re* to be sure* cocie isenns r*t the disposal of the Peder©1 Reserve System to counteract such rn expansion by the uc© of its instruments of nonetsxy control* such the aele of United St? tea Government obligations said the raising of reserve requirements of member banks* The Systea* however* in case en inflationary movement develops* will heve to cbsorb e voxy large volume of excess reserve® thfct are now in existence &nd thet mny arise froa other sources elrtedy established* such as the issuance of silver certificates end the disbursement by the Treasury of the stabilisation fund* m 1 well as froa the inflow of additional gold* The System s holdings of United States Government obligations would be entirely inadequate f to cope with the situationj the extent of the Boerd s power to raise reserve requirements has not yet been determined by Congress* but in suy case the use of that power to absorb excess reserves of 000,000*000 or store would be fraught with vimy difficulties* p*rt~ icularly since banks would h*ve the choice of giving up their Membership in the JSystea rather than to subait to a drestic advance in their reserve requirements* I assure you that the possibilities I h&ve pointed out ere not feigned or isasginsry* £a siy public record will shovr* X have long been en advocate of a vigorous reflation policy* designed to restore incomes end employment* I have also urged that everything should be done to s&intei* prosperity* once it is achieved* I t is precisely because I believe that the passage of the Fraaier-Leske Bill would not result in increased spending or eaploysent now* but would csuse e Aenger of excessive expansion of credit after recovery has been achieved* and would* thereCore* contribute to & boom end z subsequent collapse* thst I oppose the bill* There are other features of the bill th&t not sound* including the fact thst the Federal Reserve bshfce would be required to invest $5*000*030*000 in assets which* regardless of their intrinsic quality* would have e market value* on the basis of & capitalisation of the rate of return* of perhaps about half that e&ount* Consequent!}'' the Reserve banks could not* without i; ruinous loss* dispose of these esscts et »ny time for the purpose of absorbing excess reserves* or for other purpose* Tills is an iaportent phr.se of the matter* but I h^ve discussed prianrily the ©onetery aspects of the bill* since I believe that the dan-* gers in thrfc field nre sufficient proof th*t it should not be passed* Sincerely yours* EAGiLCtjh Berliner S* Eccles Governor FARM CREDIT ADMINISTRATION WASHINGTON, D.C. W . I. M Y E R S GOVERNOR August 14, 1935. Hon. Marriner S . Eccles, Governor, Federal Reserve Board, Washington, D. C . Dear Marrinerj I appreciate your thoughtfulness in sending me a copy of your letter to Senator Robinson concerning the FrazierLemke mortgage refinancing bill. I think you have summarized in a very effective manner the most critical aspects of this measure. It seems to be very difficult to get across to some people the idea that, while reflation is desirable, inflation merely creates another formidable set of social injustices. The present widespread demand for this measure seems to me to be based upon the fact that all the publicity concerning it has been given out b y its proponents and gives an entirely erroneous conception of its real effects. I think it is not improbable that the bill will pass Congress at the next session unless some effective educational work is done. Just w h o should do this is the problem* Governor.
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